Fear can’t rattle its Windows

Times Staff Writer

Microsoft Corp. blew past profit estimates for the second straight quarter Thursday and raised its projections for the rest of the year, giving a confident outlook that contrasted sharply with some of its technology industry peers.

The world’s biggest software company said efforts to crack down on bootlegged software helped boost sales of its flagship Windows operating system, which grew at a faster rate than computer shipments in the fiscal second quarter.

At the same time, sales of the Xbox 360 gaming console remained strong through the holiday quarter, which ended Dec. 31. Such top-selling games as “Halo 3" and “Mass Effect” drove the company’s historically unprofitable entertainment and devices division to back-to-back quarters in the black.


The Redmond, Wash., company’s profit soared 79% to $4.71 billion, or 50 cents a share, from $2.63 billion, or 26 cents, a year earlier, when results were depressed by a policy giving buyers the right to upgrade to future software releases. Sales increased 30% to $16.37 billion and would have improved 15% even without the year-earlier program.

More significantly for investors, Microsoft Chief Financial Officer Chris Liddell shrugged off fear of a looming recession. He said in a conference call that the company believed the global economy would continue to grow, the software industry would grow faster than the world economy and that Microsoft would grow faster than the industry.

“No company is immune” to a downturn in the U.S., Liddell said. But at Microsoft, “we have not seen any significant spillover to our business.”

The company raised its profit forecast for the fiscal year ending in June by 7 cents a share to $1.85 to $1.88 on expected sales of $59.9 billion to $60.5 billion.

Microsoft shares rose $1.32, or 4%, to $33.25 before the earnings report and jumped $1.50 more in after-hours trading.

Its rosy prognosis followed more cautious remarks this week from executives at Apple Inc., Motorola Inc. and EBay Inc.

“Apple is clearly exposed mostly to the U.S. consumer -- that’s their bread and butter, and they are the people everyone is the most concerned about right now,” said Charles Di Bona, an analyst with Sanford C. Bernstein & Co.

Microsoft has two advantages: 60% of its revenue comes from outside the U.S. and most of its products are considered indispensable. Apple’s iPods, iPhones and Macintosh computers are more susceptible to cutbacks in optional spending, Di Bona said.

In Microsoft’s most recent quarter, continuing demand for new PCs helped boost sales of Windows even before the effect of new anti-piracy technology.

With help from year-old Vista, the latest incarnation of Windows, sales at the division devoted to the software rose to $4.3 billion from $2.6 billion.

Microsoft’s other cash cow, the Office productivity suite, suffers even more from piracy; only half the copies in use have been purchased, the company said. But it’s harder to stop piracy for such applications than it is to do so for the operating system.

The business division, which sells Office and other programs, reported sales of $4.8 billion, up from $3.5 billion a year earlier.

Liddell said the entertainment and devices division had benefited from an unprecedented “attach rate” -- for each Xbox console, Microsoft and its partners sell seven games. The average buyer now spends more on games and accessories, which are far more profitable, than on the console itself.

So while sales stayed nearly flat in that division, it swung to a $357-million profit from a year-earlier $302-million loss.

Another area of great importance for the company, online services, will continue to require investment “for the foreseeable future,” Liddell said. The loss in that division more than doubled to $245 million as Microsoft spent heavily to try to keep up with Google Inc. in offerings for Web users and advertisers.

Microsoft executives offered little guidance about whether the company’s ramped-up pace of acquisitions would continue. It recently closed its largest purchase to date, that of Web advertising firm AQuantive Inc.